High-Yield 'Substitutes'

You have the higher-quality end of the market being, I would say, fair to probably expensive at this point given what the fundamentals are and then at the very low-quality end of the market, a significant amount of default risk. So, it really shrinks your universe of your buying opportunity a bit, and so we began thinking, "Where are there other opportunities?" And, high-yield to me really means high potential return for the amount of risk that you are taking. And, one market that seems to be very inefficient and seems to be possessing those high-yield characteristics is the securitized asset market.

Now there is a market that for now, for the time being, is rated triple-A, but we see a tremendous amount of downgrade pressure coming into that market and a lot of investors who are simply avoiding the market because of the destruction that we have seen due to the financial crisis in the housing downturn. So, a lot of uncertainty, but that's where our research comes into play.

And yes, we are known for credit, but we are doing fundamental research with the help of our securitized asset team. We have recently added to that group over the last year or two, and they are finding excellent value in CMBS. We are sticking to the super seniors where, because of the over-collateralization, you are picking up very attractive yields for the ratings even with the likely downgrades that we see happening.

Non-agency RMBS is also a very attractive area, but again high ratings, but likely to fall significantly into below investment-grade rating. So, really only appropriate for high-yield accounts, high-yield funds.